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Abstract

This paper illustrates two formulas for assessing independence risk based on the Bayesian and belief-functions
frameworks. These formulas can be used to assess the role of threats to auditor independence as well as the role
of threat-mitigating safeguards. Also, these formulas provide a basis for evaluation of an audit firm’s independence
risk and a framework to educate stakeholders about the threats faced by the audit firm and the role of effective
safeguards in mitigating these risks. The formulas also provide a means for regulators and lawmakers to evaluate
whether they have effective safeguards in place given the existence of threats and for auditors to signal to various
stakeholders that they have identified significant threats and have effective safeguards in place. To show the
potential usefulness of these analytical models, several illustrations addressing increased transparency and the
potential impact of regulations are presented.

Description

This is the authors final draft. The publisher's official version is available electronically from: <http://onlinelibrary.wiley.com/journal/10.1111/%28ISSN%291099-1123>.